Northern Rock and Farepak

Polly is, I think, missing the point here rather. She's also rather underestimating the problems that Northern Rock have lined up for the British economy. Lets look at the latter point first.

Polly:

True, the Northern Rock £18bn rescue fund is not taxpayers' money lost: the government will almost certainly end up with a profit, not a loss, as the bank's mortgage debts are solid.

The Economist:

The government is thought to have put in up to £23 billion ($48 billion), and the sum is growing by £2 billion-3 billion a week as depositors continue to flee. At least £10 billion of the bank's £24 billion in retail savings has already been withdrawn, some say, and Northern Rock is having little luck persuading banks to lend it new money as its existing loans come due. State support for Northern Rock already exceeds Britain's transport budget and could soon surpass the £32 billion allocated to defence—a particular embarrassment for a government accused of under-equipping its soldiers in combat zones.

At the punitive rate Northern Rock pays the Bank of England today, it cannot make a profit on any new mortgages and is losing money on many of its old ones. Its new lending is thought to have slumped to a few hundred million pounds a month, less than a quarter of the volume in the first half of the year. The longer it takes to reach a deal, the less there will be left to buy. A restructuring and sale may save Northern Rock from a lingering death, but any recovery is likely to be slow and painful.

Northern Rock is proving to be an economic disaster, but its real significance is political. When Barings Bank collapsed, there was no question of public money being put up to rescue it. It was sold for £1 to ING, and has effectively disappeared altogether. But Barings didn't cater to the 'ordinary people', it didn't hold savings or mortgages. The political cost of its fall was limited. Northern Rock is a bank for Labour voters, and cannot be allowed to go under without at least an effort to save it. Ultimately, this is all about politics - which is why ultimate responsibility belongs in fact, as well as in theory, to the Chancellor.